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The slippery slope

Europe's upstream struggled in 2016, leaving the continent more dependent on imports

Brexit overshadowed most things in Europe in 2016, including the struggling North Sea. But the continent's problems, at least in terms of domestic supply and dwindling reserves, have earlier origins. Last year brought a bit of growth, but only because previous years were so weak.

Even before British voters dumped the EU, several big investors had sold up their North Sea assets, keen to recoup cash that could be spent more profitably elsewhere. The trend, together with the slumping oil price, has been bad for output. Oil and gas production in 2014-15 was little more than half the level of five years earlier, according to Scottish government data. Panicking, London and Edinburgh scraped together some emergency funding early in the year - a ploy to tide the sector over until oil prices picked up.

While exploration remained depressed, the 2015-16 fiscal year saw UK Continental Shelf output get off the floor. Production compared with the nadir year before rose by about a fifth, to 70m tonnes (around 1.4m barrels of oil equivalent a day). Chipping in were some frontier plays, like Total's Laggan-Tomore gasfields, west of the Shetland Islands, where a processing plant opened in May. Otherwise, the main game in the maturing province was for smaller players to eke out what's left from declining fields. Despite the bump in output in the past 12 months, UK North Sea production is considerably lower than half of its 1990s peak, as the sharp decline in government oil and gas receipts shows.

But 2016 might also be seen as the year when decommissioning came into its own. Getting rid of the infrastructure, said the UK government's Oil and Gas Authority, could cost about £50bn ($61bn) by 2050 - either a big after-party bill to pay or bonanza in the making, depending on whether you're a producer or a scrap merchant.

In Norway's section of the North Sea, output changed little in the first eight months of the year, running at around 1.5m-1.65m b/d of crude, a similar level to 2015. Gas production dropped: by August, Norway was producing about 9.0bn cubic metres, compared with 9.7bn cm in the year before. For all of 2016, the government expected spending on oil and gas projects to fall by 16%, to just under $20bn. Workers shut down some facilities in protest at their falling wages.

At least explorers kept hunting in Norway's frontier, where shallower and warmer waters make activity easier and cheaper than in other parts of the Arctic. In early 2016, the Eni-operated Goliat oil platform was the first to begin operations on Norway's section of the Arctic Ocean shelf, on the border between the Norwegian Sea and the Barents Sea. A hiccup came in August, when a power failure shut in the 100,000-b/d facility for a month.

Otherwise, Europe's upstream offered thin gruel. The UK, Norway and Denmark all went ahead with licensing rounds. The UK pushed through some shale gas-friendly legislation. Further south, smaller producers like Bulgaria and Greece struggled to lure investors to their upstream. Poland's shale promise - much proclaimed in recent years - remained unfulfilled.

The diminishing returns of the European upstream were good news for exporters targeting the continent. American liquefied natural gas was the headline-grabber - the first cargo from the new US plants arrived in Spain. LNG was diverted from Asia's weaker-than-expected market to Europe too.

Poland's regasification terminal in Świnoujście, on the Baltic, received its first commercial cargo, from Qatar, in mid-2016. Politicians heralded the 5bn-cm-a-year plant as a cornerstone of the country's strategy to replace Russian supplies. Yet Gazprom, pressing ahead with new supply routes to Europe, still set an all-time high for exports to the continent (including Turkey) in October, when it shipped 0.579bn cm in a single day.

Indeed, 2016 might be the year when Gazprom, sensing the threat of LNG arrivals in its core market, started to fight back. Its piped exports to the continent rose to 109bn cm, or by a startling 36%, in the first half of the year. The Russian export monopoly - which hoped in October that it would soon settle an anti-trust case with the European Commission - said it had increased shipments to meet rising demand. Others saw an attempt to price out LNG. Either way, Europe's hard-pressed and import-needy consumers started receiving cheap gas. It was another blow for coal demand, which after a surge between 2009 and 2012, continued to fade in 2016.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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